Bank of EnglandJun 24 2021

Pound plunges after BoE’s dovish tone

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Pound plunges after BoE’s dovish tone
Luke MacGregor/Bloomberg

Sterling has plunged against the dollar as the Bank of England confounded expectations of a more hawkish tone around inflation risks.

The pound fell 0.5 per cent against the dollar and Euro as the UK’s central bank’s monetary policy committee (MPC) announced it would maintain interest rates at 0.1 per cent and expected the current rising inflation environment to be "transitory".

Expectations of a more hawkish tone on rate rises was expected after the US Federal Reserve brought forward its timeframes on raising rates, hinting it could raise rates twice in 2023, a year earlier than planned. 

In contrast, the MPC said “financial market measures of inflation expectations suggest that the near-term strength in inflation is expected to be transitory.”

The committee added that it expected inflation to rise as high as 3 per cent driven by a rise in energy and commodity prices, however this would only be for a "temporary period".

Laith Khalaf, financial analyst at AJ Bell, said that it won’t be clear if inflation will last until the end of this year.

“The bank’s projections of contained inflation in the medium term are not without merit and there are still deflationary forces in today’s global economy, not least the possibility the pandemic may yet throw another curve ball that forces us to erect social barriers once again. 

“We can’t really blame the bank for not nailing down such a dynamic and unpredictable situation, but it’s worth recognising that the data points on which monetary policy is being formulated are pretty shaky right now and subject to considerable change.

“Like Schrödinger’s cat, inflation may be alive and well, or flat on its back, we just can’t tell which right now.”

Sam Pham, investment strategist at Tilney Smith & Williamson, said although the statement appeared to be more dovish than previous speeches, the MPC was still less tolerant to consistently above-target inflation than its US counterpart. 

He said: “This relative hawkishness has two important implications. First, interest rates traders are already pricing in more likelihood of a rate hike by the BoE than the US Fed over the next twelve months. So any future hawkish surprise by the Fed will weigh on the cable exchange rate, just like the Fed’s June meeting did last week. 

“Second, the prospect of higher UK inflation and interest rates favour shorter duration UK fixed income, and inflation-linked to nominal UK government bonds.”

Others pointed out the immediate impact higher inflation would be having on savers.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Inflation is set to go above 3 per cent this summer, dealing yet another horrible blow to savers.